Thanks to what could be a looming regulatory approval, shares of Lexicon Pharmaceuticals (LXRX -3.75%) are soaring, rising by 33% in the last 30 days and 74% over the last 12 months. Wall Street analysts are on average quite bullish, with the average year-ahead price target for the stock currently more than double its current price and with some estimates over the last six months calling for growth in excess of 300%.

But is this biotech actually capable of wowing shareholders with a continuation of such a steep run-up? Let's dive in and analyze what's going on.

What's driving the ascent?

Lexicon is a pre-revenue biotech company that's internally developing a trio of molecules that could treat heart failure, type 1 diabetes, and diabetic neuropathy, among a couple of other conditions. With around $106 million in cash and investments, and an operating cash burn of $90.1 million in 2022, it needs to make something big happen soon if it wants to avoid slashing its budget or raising more money. Luckily for investors, such a positive catalyst might be right around the corner. 

Its flagship program is its drug sotagliflozin, which is intended to treat heart failure in people with diabetes. The program's phase 3 clinical trials are over, and  based on the data collected, the medicine reduced fatality rates among patients admitted to the hospital with worsening heart failure, not to mention lower rates of hospitalization and 33% fewer urgent visits for symptoms of heart failure. That data is fairly promising, and the market's positive reaction to it indicates that at least some knowledgeable market participants agree the findings are valuable. Per a report by Market Research Future, the market for heart failure medicines is expected to grow from a size of $12.2 billion in 2022 to reach $18.3 billion by 2030, so Lexicon will have plenty of demand for its drug if it gets regulatory approval. 

On May 27, regulators at the Food and Drug Administration (FDA) will decide whether to approve sotagliflozin for commercialization. Wall Street analysts have high hopes for its chances, with their average sales estimate for 2023 surpassing $16.5 million. Compared to 2022's negligible $139,000 in revenue, it won't take much in the way of new income to trigger a huge amount of growth for shareholders. So it seems like getting the approval makes Wall Street's projections quite likely to come true, and promptly.

In that context, it's no surprise why management is eager to get the ball rolling, with CEO Lonnel Coats stating that the company is capable of launching the drug before the close of the first half of 2023 in the event of regulatory approval. 

That timeline would give it around one month to start selling sotagliflozin after approval before missing its self-imposed deadline. Whiffing that deadline would likely be inconsequential in the long term. But getting even some revenue on the books for the month of June would enable Lexicon to report some preliminary sales data in its second-quarter earnings. And if that month's worth of data confirms even a bit of Wall Street's narrative, it would probably send the stock soaring once again.

Don't discount the risks

If you're thinking about making a purchase of Lexicon's shares in advance of the FDA's ruling, you aren't alone. I added to my position on May 4. But doing the same might not necessarily be the right move for you. 

If regulators find an issue with the sotagliflozin application, it'll be a significant setback and will lead to an immediate fall in Lexicon's shares. Investing right now means accepting that this is a high-risk play and that the prospect of realizing a large and long-term reward comes with the moderate chance of experiencing a steep loss. The only outcome to rule out is a situation in which its share price chugs sideways.

On the other hand, if sotagliflozin gets the green light, it could just be the start of Lexicon's growth journey. With money rolling in from a rapid commercial rollout, it could ostensibly bring some of its mid-stage clinical programs to the market before the close of the decade. That would make for quite the reward for people who invested now. But don't bet on the stock if you aren't comfortable losing money.